About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

Q2 Chinese GDP Forecast: Too Optimistic?

The Chinese economy is slowing down. This is a fact. You can see this clearly in how the economy’s growth has fallen from its 11.9% peak back in the Q1 2010 to just around 7.7% in Q1 2013. From the data that has been coming out recently, the slowdown doesn’t seem to be over yet!

According to a poll run by Reuters, economists and analysts believe that the Chinese economy probably expanded only 7.5% in Q2 2013 from exactly a year ago. In addition, they also see growth prospects for the year as grim.

Now, I don’t consider myself a gloom-and-doom type of economist but data recently released suggest that the 7.5% growth predicted is perhaps a tad bit too hopeful!

For instance, Chinese trade data greatly fell short of expectations. It showed that China’s exports fell by a whopping 3.1% in June, which was significantly lower (and opposite) the 4% gain the market had initially expected. Imports also took a hit as they declined 0.7%. Weak foreign demand coupled with puny internal demand is a very deadly combination for growth.

Heck, even the future of China’s trade industry looks bleak. The official Manufacturing Purchasing Managers’ Index (PMI) of China slipped to 50.1 in June from May’s 50.8, which is just a sliver above the 50.0 level that separates growth from contraction. Meanwhile, a separate PMI survey sponsored by HSBC dropped to its lowest level in 9 months to 48.2.

How about the job market? It’s just as crappy too, apparently. A government-run survey revealed that hiring in factories shrunk for the 13th consecutive month in June. To illustrate, China’s biggest ship-building company slashed 8,000 jobs in the past few of months.

These new developments increase the chances of a sharp slowdown in growth, which is contrary the “soft landing” that economists had anticipated. The risks to the GDP are now more to the downside, and that a hard landing is more likely. For the first time ever, China will likely miss its growth target for 2013.

Potential Effect on Currencies

In the past several months, the People’s Bank of China (PBoC) has adamantly resisted in taking any policy action to support the economy. It has instead chosen to go for a more balanced approached. It wants to rely on sustainable growth rather than depend on excessive stimulus measures funded by large amounts of debt.

But a terrible GDP figure could change all that. If the GDP disappoints, the PBoC could shift gears and reconsider its hard line stance towards monetary policy. In fact, when the weaker-than-expected trade figures were released, the Chinese stock market actually rallied 2%, which was its biggest advance since March.

Watch the results carefully, folks. If the actual result misses consensus, it’s reasonable to expect for risk to pick up and lead to a rally in high-yielding currencies like the Aussie and the Kiwi.